Witnesses tell Senate Finance Committee ways to improve tax system

Witnesses gave the Senate Finance Committee a variety of suggestions
on how to fight tax identity theft and fraud, reform the tax system,
and fund the IRS during a hearing on Tuesday. The committee heard from
witnesses representing the IRS, the Taxpayer Advocate Service, the
Social Security Administration (SSA), and the AICPA.

Tax filing season

Jeffrey Porter, chair of the AICPA Tax Executive Committee, shared
with the committee feedback on the just-concluded tax filing season,
which got off to a delayed start because of the late enactment of the
American Taxpayer Relief Act of 2012, P.L. 112-240. He noted the
challenges the IRS faced in administering this tax season, but also
told the committee in his written testimony that the “adverse impact
extends to taxpayers and tax return preparers who face additional
burdens attributable to the disruption to normal and efficient work
streams and planning. In this context, our members and their clients
faced a very compressed and difficult filing season this year.”

He also informed the committee that the delayed release of forms
“caused significant anxiety for taxpayers.” He wrote that the “delay
created an aura of confusion, particularly for my elderly clients, and
sometimes required additional efforts by them.”

Porter also brought to the committee’s attention problems with Form
1099-B, Proceeds From Broker and Barter Exchange
Transactions, and amended Forms 1099-DIV, Dividends and
Distributions. While the forms must be furnished to taxpayers by
Feb. 15, brokerages can amend them at any time, and he reported that
one large brokerage firm issued corrected 1099s on April 2 this year,
causing many taxpayers who had already filed their Forms 1040 to have
to file amended returns.

To solve this problem, Porter’s written testimony told the committee
that the AICPA recommends “you consider legislation that would permit
taxpayers to report de minimis changes in their income from a
corrected Form 1099 or amended Schedule K-1 (from a partnership,
trust, or S corporation) in the year of receipt of the amended form.”

Identity theft

Porter identified tax identity theft as, “one of the most important
topics for our members this year.”

Acting IRS Commissioner Steven Miller acquainted the committee with
the IRS’s recent efforts to combat identity theft and refund fraud. He
testified that more than 3,000 IRS employees currently work on
identity theft issues and more than 35,000 have been trained to help
taxpayers recognize identity theft. He also described the IRS’s
increased fraud detection efforts and noted that the IRS has suspended
or rejected more than 2 million suspicious returns this filing season.

Miller also discussed barriers to further progress: “One is the
sheer volume and complexity of these crimes, as identity thieves
continue creating new ways of stealing personal information and using
it for their gain. Another is the need to further upgrade our
technology in order to implement improvements such as more
sophisticated filters and better taxpayer authentication procedures.”

Miller described several proposals that would help the IRS stop
refund fraud caused by identify theft. These included:

Expanding IRS access to information in the National Directory
of New Hires to allow for data matching and verification of taxpayer
claims during processing;

Granting the IRS authority to require or permit truncated Social
Security numbers on W-2 forms; and

Enacting a $5,000 civil penalty for tax-related identity theft.

Porter applauded the IRS’s issuance of proposed regulations
(REG-148873-09) implementing a pilot program to allow truncated Social
Security numbers on certain payee statements. He urged the IRS to make
the program permanent and to extend it to “all types of tax forms and
returns provided to a taxpayer, employee, or other recipient.” He also
urged Congress “to consider a legislative proposal to change the Sec.
6051 reporting requirement to permit truncation of employee SSNs on
all copies other than the copy filed with” the SSA.

Porter also expressed the AICPA’s support for civil penalties for
tax-related identity theft, including penalties on fraudulent tax
return preparers. He noted that some tax return preparers will claim
increased refunds for clients and pocket the extra money themselves.
“The AICPA fully supports efforts,” he wrote, “such as H.R. 5630, to
deter such outrageously unethical behavior.”

In assessing the IRS’s efforts to combat tax identity theft and
refund fraud, Miller testified, “Although we cannot stop all identity
theft, our efforts thus far have provided a solid foundation upon
which we will continue to build and improve.”

National Taxpayer Advocate Nina Olson, on the other hand, was not so
optimistic. “I remain deeply concerned,” she remarked in her written
testimony, “that victims often have to wait in excess of six months to
have their cases resolved and receive their refunds, and the IRS has
yet to implement an effective program for overseeing cases with
multiple issues that require coordination among functions, thereby
allowing too many victims to fall between the cracks of IRS bureaucracy.”

Marianna LaCanfora, the Social Security Administration’s acting
deputy commissioner for retirement and disability policy, discussed
restricting access to death information as a way to combat identity
theft. She noted that, “Just as access to accurate death information
helps agencies to combat fraud and reduce improper payments, we
understand that the public availability of death information could
contribute to fraud perpetrated by criminals.”

Therefore, she said in her written testimony, the SSA believes “that
this information should no longer be accessible to those entities or
individuals who might misuse it.” However, she also noted that, “we
[the SSA] do not currently have a legal basis to withhold nonstate
death information under [the Freedom of Information Act].” She called
on Congress to “strike the proper balance between restricting access
to death information and making it available to those entities that
legitimately need the information to combat fraud.” She also applauded
a proposal in President Barack Obama’s proposed FY 2014 budget that
would delay for three years after an individual’s death the release of
that individual’s information on the Death Master File (DMF) that the
SSA maintains.

Acting Commissioner Miller also discussed in his written testimony
the president’s budget proposal to restrict access to the DMF and
said, “this change would make it more difficult for identity thieves
to obtain identifying information of deceased persons in order to file
fraudulent returns.”

The national taxpayer advocate also recommended that Congress take
immediate steps to restrict public access to the DMF.

Access to tax return information

In her testimony, Olson raised the issue of increased access to
taxpayer return information as the IRS steps up efforts to share
information with state and local law enforcement (see “IRS’s Identity Theft
Liaison Pilot Program With Law Enforcement Expands to 50
States”). She noted that state and local authorities are not
governed by the strict rules of Sec. 6103 that require the IRS to keep
taxpayers’ return information confidential.

With increased information sharing, she noted, “it is only a matter
of time before one or more local officials—who unlike IRS employees do
not receive regular training about the importance of protecting this
information—use tax return information carelessly or inappropriately.”

While such information is released to state and local authorities
only with the taxpayer’s consent, Olson believes taxpayers assume
those authorities have the same legal obligations as IRS employees to
keep their information confidential. She informed the committee, “It
is critical that safeguards be put in place immediately to prohibit
law enforcement authorities who receive tax return information for a
specified purpose from using or re-disclosing that information for any
other purpose without additional taxpayer consent.”

Wage reporting

LaCanfora also discussed two proposals in the president’s budget to
improve the wage-reporting process and help prevent fraud. The first
proposal would reduce the electronic wage reporting threshold to 50
employees (from the current 250). She wrote this would “increase the
percentage of electronic filing to approximately 90% of all W-2s.” She
listed several benefits: “This will enable us to take better advantage
of automation, reduce the work effort required to process paper forms,
reduce errors caused by manual processing, and speed the process of
correctly posting wages.”

The second proposal would require employers to report wages
quarterly instead of annually. LaCanfora wrote that this change would
“enhance our ability to detect fraud and curb improper payments in our programs.”

IRS budget

Miller described the current budget environment as a barrier to IRS
progress on identity theft and fraud, and he noted that the IRS budget
has been reduced by $1 billion in the past two years. According to
Miller, however, the IRS funding level in the president’s proposed FY
2014 budget would allow the IRS to hire 800 more full-time employees
dedicated to identity theft work.

The national taxpayer advocate testified that, “significant
reductions in the IRS’s budget since 2010 are harming taxpayers and
undermining the IRS’s ability to raise the revenues on which the rest
of government depends.” She described it as, “self-defeating to apply
across-the-board budget cuts to the IRS as a means to reduce the
budget deficit, because the IRS collects substantially more than one
dollar in federal revenue for each dollar it receives in appropriated
funds.”

Olson did acknowledge that the Finance Committee is not responsible
for the budget, but she urged the committee members to work with the
members of the Appropriations Committee to ensure the IRS “is
adequately funded to do its job.”

Return preparer regulation

Although the IRS’s program for regulating tax return preparers has
been struck down by a federal district court and the case is currently
on appeal (Loving,
No. 12-385 (D.D.C. 1/18/13), appeal docketed No. 1:12-cv-00385-JEB
(D.C. Cir. 2/21/13)), Miller and Olson both discussed their belief
that the program should continue. Miller told the committee that the
president’s proposed FY 2014 budget includes $18.3 million for
continued implementation of the return preparer regulation program. In
his written testimony, he said the program “complements the IRS’
efforts on refund fraud and identity theft, given that these crimes
often involve individuals who prepare tax returns on behalf of others
to obtain fraudulent refunds.”

Olson urged Congress to “grant the IRS the authority to continue to
implement its well-designed initiative to improve standards in the tax
preparation industry” if the IRS loses its appeal in the Loving case.
She noted that the Finance Committee has twice approved legislation
that would permit the IRS to regulate tax return preparers.

Porter informed the committee that “The AICPA has always been a
steadfast supporter of the IRS’s overall goals of enhancing compliance
and elevating ethical conduct. Ensuring that tax preparers are
competent and ethical is critical to maintaining taxpayer confidence
in our tax system. Indeed, these goals are consistent with AICPA’s own
Code of Conduct and enforceable tax ethical standards.”

Expanding the ethical umbrella of Circular 230 over all paid
income tax preparers;

Creating a continuing education and competence construct geared
towards the “unenrolled” preparer community who prepare Form 1040
series returns; and

Recognizing the potential for taxpayer confusion regarding the
relative qualifications of different paid preparers through the
issuance of Notice 2011-45, which constrains “registered tax return
preparers” from misleading advertising and solicitation and will
require these preparers to use the following statement in ads: “The
IRS does not endorse any particular individual tax return preparer.
For more information on tax return preparers go to IRS.gov.”

Penalty reform

Porter also raised the issue of penalty reform with the committee.
He noted that the AICPA recently expressed
its concern over the current civil tax penalty situation and
suggested improvements. He wrote in his testimony that the AICPA
“strongly encourage[s] an inclusive and transparent framework for
approaching this difficult task, similar to the collaborative efforts
that culminated in [the Improved Penalty and Compliance Tax Act of
1989]. We urge Congress to work with taxpayers, practitioners,
professional organizations, and other stakeholders in developing a
systematic and thoughtful approach to civil tax penalty reform and
penalty administration.”

Information reporting

Porter also addressed information reporting and its current
effectiveness. He brought up several factors for the committee to
review and wrote, “the AICPA recommends addressing sources of the tax
gap through the consideration of information reporting options.” He
also noted that “information reporting can assist voluntary compliance
by providing summary information to taxpayers for reporting on their
tax returns.”

Due dates

Porter expressed to the committee the AICPA’s support for the Tax
Return and Due Date Simplification and Modernization Act of 2013 (S.
420), which was introduced in February. He explained that “tax return
due dates have been a concern for the AICPA for several years. Under
the current system, the statutory due date for partnerships to file a
tax return is the same day as for trusts, many estates, and
individuals, and one month after the due date for corporations. As a
result of these due dates, it is almost impossible for taxpayers and
practitioners to file a timely, accurate return on the original due
date if they have investments in partnerships.”

Under S. 420, information from flowthrough entities would be due
before the flowthrough entities’ investors have to file their returns.
Porter also wrote, the bill “simplifies and better aligns other types
of tax return and information return reporting due dates.” He noted
that this would “increase the accuracy of tax returns and reduce the
need for extended or amended corporate and individual income tax
returns, resolving many of the current due date problems.” He also
mentioned the bill would help reduce the filing season compression.

Tax reform

Olson and Porter testified on the topic of tax reform. Olson noted
that “it has been 27 years since Congress last enacted comprehensive
tax reform, and it has been 15 years since Congress last passed major
taxpayer rights legislation. There is a significant need for
legislation in both areas.” She urged Congress to “simplify the tax
code to reduce [the] burden on taxpayers and the IRS.”

Porter testified that “the AICPA strongly supports the leadership
taken by the Committee in studying tax reform and potential solutions”
and that “the AICPA is committed to assisting this Committee and
Congress in the development and passage of tax reform proposals which
focus on simplifying the tax system for families and businesses.”

On behalf of the AICPA, Porter suggested six proposals to improve
the administrability of the tax law:

Latest News

FEATURED VIDEOS

Most Read

Features

MANAGEMENT ACCOUNTING

A good leader recognizes that part of the job is developing the next generation of leaders. Veronica McCann, CGMA, a former division CFO at Commerzbank in Singapore, shares tips on developing future finance leaders.

A weekly snapshot of global accounting with news from the Journal of Accountancy and other leading accounting publications. It includes summaries of what matters to you, written by expert editors to save you time and keep you informed and prepared.